Emerging markets: A Q&A on cash flow, dividends, and discipline

Reflecting on the strategy’s evolution, lead portfolio manager Matt Williams addresses nine key questions about the drivers of performance, the enduring principles behind the approach, and the reasons why the outlook for emerging markets (EM) remains compelling.

What defines your approach to managing an EM equity income strategy?

Our starting point is simple: markets regularly misprice company fundamentals. We aim to identify those gaps by forming our own long-term view of cash flows, earnings, and returns, and comparing that with what is already reflected in valuations.

This disciplined approach has remained consistent, grounded in bottom-up analysis and a focus on uncovering durable business models.

Looking back on the past two years, what moments or themes stand out most?

The rapid emergence of generative artificial intelligence (AI) has been a defining theme. Rather than focusing solely on companies building AI systems, we have increasingly targeted those helping to monetize the technology through real-world applications – such as wireless connectivity chipmakers, semiconductor designers, and memory manufacturers.

More broadly, EMs have shown resilience. The asset class rose 34% in 2025 and was up around 15% year-to-date (as of end of April), even against a backdrop of geopolitical uncertainty.¹ At the same time, we believe valuations remain compelling, with EMs trading at a 40% discount to the S&P 500.²

What aspects of the investment philosophy have remained constant since strategy launch and why do they still matter?

Our philosophy has not changed. We believe cash flow gives one of the clearest and most reliable indicators of business quality, which is why we describe our approach as follow the cash flow. It helps us test management narratives and focus on companies with sustainable fundamentals.

We also see income as a critical, and often overlooked, part of total return in EMs. The asset class has evolved significantly: more than half of EM companies now offer a dividend yield above 3%, and since 2010 a greater proportion of companies in EM (~87% today) pay dividends than in developed markets.^3,4 For investors, that means income and growth are not competing objectives, but complementary drivers of returns.

Where has the approach evolved as the strategy has matured?

While the philosophy has remained intact, the framework around it has been strengthened. Following the 2018 merger of Aberdeen Asset Management and Standard Life Investments, we introduced a pod-based structure to reinforce accountability and improve portfolio construction discipline.

That added a formal layer of risk oversight. Supported by the Investment Risk and Process team, the pod reviews exposures, correlations and macro scenarios on a regular basis, using insights from our proprietary equity risk tool. This ensures a consistent feedback loop between stock selection and portfolio construction, while keeping risk tightly controlled.

What are the key lessons from managing an EM income strategy across different market environments?

One key lesson is the value of balance. The strategy combines dividend-growth businesses with high-dividend companies, rather than relying on one style. That helps deliver a more resilient return profile across the cycle.

There will be periods of underperformance - particularly when markets favor early-stage, pre-cash flow companies or mature businesses in structural decline (value traps) that sit outside our investable universe. But these phases have historically been short lived. Over time, markets tend to refocus on cash generation and fundamentals, which is where our approach is strongest.

What role has income played in shaping returns and resilience since the strategy’s launch?

Income has contributed to the overall performance of the strategy since inception. We seek to provide a yield that is typically higher than the benchmark, with a target of approximately 130% of the benchmark yield. Historically, this yield premium has contributed about 1% per year to returns since the strategy’s inception, representing roughly one-third of the total excess returns.⁵

Importantly, income also helps smooth the return profile. It can provide a component of total return, while longer-term investments play out. We believe that income is generated by companies with strong cash flows and disciplined capital allocation, we believe it is sustainable rather than cyclical.

How do clients typically use EM income strategies in portfolios and has that changed over time?

Historically, clients use the strategy as a core EM allocation, complemented by more thematic or higher-growth satellite exposures. This may reflect a demand for a potentially balanced return profile within what can be a volatile asset class.

There has also been a gradual shift from passive to active investment. We believe the combination of income and stock selection can offer a more balanced total-return profile, which has resonated with investors seeking both resilience and long-term growth.

What client feedback has resonated most as the strategy has grown?

Clients consistently highlight the discipline and repeatability of the approach. They also value the scale of our research platform, with around 50 investment professionals across seven global locations providing local insight and access to management teams.

The portfolio structure stands out as a key advantage. By striking a balance between dividend-growth companies – with EM dividends having risen by about 12% annually since the early 2000s, surpassing those in developed markets – and high-dividend firms, we provide diversification that helps navigate a range of market conditions.⁶ Combined with a controlled level of active risk, that has created a return profile clients see as both consistent and robust.

Looking ahead, where do you see the most compelling opportunities and the key risks?

Despite recent geopolitical tensions, we remain constructive on emerging markets. The structural drivers behind the current cycle are intact, including rising global capital investment, the build-out of data center infrastructure, increased defense spending, decarbonization, and supply chain diversification. Emerging markets are playing a central role in many of these areas.

At the same time, valuations remain at a meaningful discount to developed markets. In our view, this creates a compelling backdrop for active investors, particularly those focused on identifying companies with strong cash flows, resilient earnings and sustainable returns.